Estate Plan Options In Response to Changes in the Estate Tax Exemption and the “Step-Up Basis”

To fund sweeping plans to combat Covid-19, provide aid to businesses and families impacted by the pandemic, and rebuild America’s infrastructure, the President has proposed significant changes to the tax code. Two of those changes are particularly notable if you are considering your own estate plan.  

First, the estate tax exemption will be reduced. Under the current rules, federal estate taxes generally only impact those in the highest tax brackets. However, if the President’s proposals become a reality, more estates may be impacted.32

Second, the tax code revisions would eliminate the ‘step-up basis’ for inherited property. This would result in continued tax revenue from the very wealthy and additional revenue from people who inherit even relatively modest assets. 

Let’s review each proposed change and how it could affect your estate planning strategy.

The federal estate tax exemption is the amount excluded from estate tax when a person dies. The lifetime gift exemption is the amount you can give away during your life without paying taxes on those gifts. For 2021, those exemptions are $11.7 million, and married couples have a combined exemption of $23.4 million.  

Under the current tax code, if a person passes away this year, any portion of their estate over the exemption amount is generally subject to the estate tax, which is currently set at a rate of 40%. Because this threshold is relatively high, less than 1% of estates pay this tax .  

President Biden’s plan would lower the exemption threshold to $3.5 million, and the lifetime gift tax exemption would be reduced to $1 million. Also, the tax rate on any amounts above those limits would increase to approximately 45%, up from a slightly lower 40%, which is the current rate. These reduced amounts would increase tax revenue from smaller estates (though still over $3.5 million) and individual citizens who make lifetime gifts over $1 million. 

As you likely know, there is a debate on whether the Biden Administration can get its tax proposals passed through Congress.  So, you will have to decide whether you want to proactively adjust your estate planning strategy or wait to see what tax changes actually become law. 

If you do want to get ahead of any possible tax increases, you can take advantage of the higher exemptions currently in place and make large gifts throughout this tax year. 

Gifting will reduce the size of your estate, but you may need to weigh this benefit against your need for cash flow and liquidity. Gifting interests in a family business or creating Spousal Limited Access, Irrevocable Life Insurance, and Grantor Retained Annuity Trusts are other available methods to reduce future estate taxes. 

Under the current tax code, assets are valued at the time of the owner’s death, even if the value has gone up. For example, if your grandfather purchased stock worth $50,000, and at the time of his death it had increased to $150,000, the gain is $100,000, and you would owe capital gains taxes on that amount. 

However, if the stock is passed on to you, the law allows the gain to be eliminated because the stock value is ‘stepped up’ to $150,000. In that case, you may sell the stock free of any capital gains taxes. Additionally, if the value of your grandfather’s estate is under the current exemption threshold, the estate does not have to pay taxes either. 

If President Biden’s tax proposal is accepted and the “step-up basis” rule is eliminated, the appreciation of unsold assets, known as unrealized gains, would be taxed when the owner dies and the assets transfer to the heirs. This could result in significant tax consequences for people inheriting assets with high appreciation values. The good news is that this proposal would only tax gains over $1 million, and heirs who inherit a business or farm and continue to operate it would not owe taxes on these assets.

Similar to the estate planning strategy used to counter a reduction in the estate tax exemption, individuals may benefit from placing assets into trusts if the “step-up” basis is eliminated. Gifting cash to your heirs to offset any capital gains taxes they must pay on their inheritance could also minimize the impact of the proposed tax code changes. 

While there is no guarantee that the Biden administration’s tax proposals will become law, there are options if you want to proactively protect your heirs and your estate. Consult your attorney to determine the best estate planning strategy for you.

Founded in 2003 by husband and wife legal team, Randell C. Doane and Rebecca G. Doane , Doane & Doane provides legal and financial services to families, individuals, and businesses throughout Southeast Florida. 

Estate planning is about much more than just giving away property.  It is an act of love and kindness, with the ultimate goal of providing for the future financial security of your loved one.  At Doane & Doane, our tax and estate professionals help people plan for retirement, consider various types of wills and trusts, make provisions for loved ones, figure out future child support, and minimize tax liability.  Experienced wills and trusts attorneys know which tools to use to get the best results for their clients.  Our lawyers can help you determine which tools are best suited to your specific circumstances. 

When it comes to probate matters, such as the formal administration of an estate, Florida fiduciaries seek the assistance of the attorneys at Doane & Doane, P.A. to administer and manage their trusts and estates.  Notably, the founding partners of Doane & Doane are board-certified West Palm Beach Probate Attorneys . With the additional advantage of certified public accountancy in their backgrounds, they present a unique combination of skills and experience which enables them to effectively settle, administer, and manage clients’ trusts and estates. 

Since the day we opened our doors, we have worked hard to earn a reputation as one of the region’s most prominent tax and estate planning law firms in Palm Beach County, Florida. Our dynamic team includes the firm’s founding partners, experienced associate attorneys, and an outstanding team of paralegals, legal assistants, and support

Call the Palm Beach County lawyers at Doane & Doane, P.A.  You can reach us at 561-656-0200.  Call us today.

The information in this blog post is provided for informational purposes only and is not intended to be legal advice. You should not make a decision whether or not to contact an attorney based upon the information in this blog post. No attorney-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.